Business Context and Reporting Period
Company: Salesforce, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2008 (First Quarter of Fiscal Year 2009)
Business Overview: Salesforce is the leading provider of on-demand customer relationship management (CRM) software. The company operates in a single segment, deriving revenue primarily from subscription fees and professional services. The fiscal year ends on January 31.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended July 31, 2008 |
Six Months Ended July 31, 2008 |
|---|---|---|
| Total Revenues | $263,077 | $510,699 |
| Gross Profit | $208,986 | $405,310 |
| Gross Margin | 79% | 79% |
| Operating Income | $16,098 | $31,519 |
| Net Income | $9,996 | $19,551 |
| Diluted EPS | $0.08 | $0.16 |
| Cash from Operating Activities | $53,075 | $136,907 |
| Cash & Marketable Securities (Balance Sheet) |
$823,417 (as of July 31, 2008) | |
| Deferred Revenue (Current + Noncurrent) |
$479,546 (as of July 31, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 49% year-over-year for the quarter and 51% for the six-month period. Subscription and support revenue grew 50% (quarter) and 51% (six months), driven by an increased number of paying subscriptions.
- Profitability: Operating income improved significantly to $16.1 million (6% margin) for the quarter, compared to $3.3 million (2% margin) in the prior year quarter. Net income rose to $10.0 million from $3.7 million.
- Expense Increases: Operating expenses increased due to strategic investments in growth. Marketing and sales expenses rose 45% (quarter) and 46% (six months), while R&D expenses increased 59% (quarter) and 50% (six months). Stock-based compensation totaled $18.9 million for the quarter and $36.9 million for the six months.
- Geographic Expansion: Revenues from Europe and Asia Pacific grew to 28% of total revenue for the quarter, up from 24% in the prior year period.
Guidance, Outlook, and Risks
Management Commentary: Management expects revenue growth to continue as the company adds customers and upgrades existing subscriptions. However, the growth rate percentage may decline as the revenue base expands. The company plans to continue investing heavily in marketing, sales, and data center capacity (including a new facility in Singapore).
Recent Acquisition: On August 4, 2008, Salesforce acquired InStranet, Inc., a knowledge management application provider, for approximately $31.5 million in cash.
Risks and Contingencies:
- Service Disruptions: Defects or interruptions in the on-demand service could harm reputation and lead to liability.
- Competition: The market is intensely competitive with major enterprise software vendors (e.g., Oracle, SAP, Microsoft).
- Security: Breaches of security measures could expose the company to significant legal and financial liability.
- Stock-Based Compensation: Future results will continue to be materially reduced by the requirement to expense stock-based awards ($229.4 million remaining to be amortized).
- Foreign Currency: Results are subject to fluctuations in exchange rates, particularly the Euro, British Pound, and Japanese Yen.
Investor Verification Checklist
- Deferred Revenue: Verify the $479.5 million deferred revenue balance, which represents future revenue recognition and indicates sales momentum.
- Stock-Based Compensation: Review the $229.4 million of unamortized stock compensation and its impact on future operating margins.
- Customer Concentration: Confirm that no single customer accounts for more than 5% of revenue or accounts receivable.
- Liquidity Position: Assess the $823.4 million in cash and marketable securities against future capital expenditure needs and potential acquisitions.
- Acquisition Integration: Monitor the integration and financial impact of the InStranet acquisition.